Unleashing economic potential: decoding the FDI-economic growth nexus in G-15 economies amidst unique host country traits

Abstract

This study examined the impacts of Foreign Direct Investment (FDI) on economic growth across top the five G-15 countries over a period of 33 years, while considering the influence of key host country traits, namely macroeconomic stability, financial development, human capital, and trade openness. The selection of these variables was firmly supported by both theoretical foundations and empirical studies that highlight their significant role in shaping the FDI–growth interconnection. Panel data derived from World Bank Indicators, spanning the period from 1989 to 2021, were analyzed using a feasible generalized least squares method (FGLS), a rigorous approach, including descriptive statistics, correlation analysis, cross-sectional dependence tests, unit root tests, and multiple regression models. By exploring the interconnection between FDI and the characteristics of the host country, this study sheds light on how these factors collectively contributed to economic growth in the G-15 economies. Descriptive statistics indicated a favorable trend in economic growth, with an average of 3.470 and a standard deviation of 4.289. Correlation analysis revealed significant positive relationships between Economic Growth and Gross Capital Formation, Human Capital, and Liquid Liabilities. Conversely, FDI, Inflation, and Trade Openness displayed insignificant positive correlations with Economic Growth. The findings also demonstrated that favorable host country traits magnified the impact of FDI on economic growth. Specifically, increased Financial Development, Human Capital, and Trade Openness enhanced the positive effects of FDI on economic growth. However, Inflation had a dampening effect on the growth factor. Policymakers in G-15 countries should give precedence to developing strong financial markets, promoting trade liberalization, and investing in human capital to optimize the advantages of FDI. This research addresses a critical gap in the literature as limited empirical work has been conducted on the FDI–growth relationships specific to the G-15 economies, which hold substantial influence in the global investment landscape and showcase remarkable economic growth. By employing rigorous panel data methodology and a long-term dataset, we provides original insights into the interaction between FDI and host country characteristics, contributing to the existing body of knowledge.